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Environmental Due Diligence in the Real Estate and Business Deal - Background Legal Principles

By way of background, if you're a real estate lawyer, you'll want to understand that environmental law principles as applied in the context mostly derive from established real estate principles, though with a few twists - others can skim through this discussion or even skip it, but you might find it's interesting. Some of this is borrowed from my environmental law colleague Alan Knauf, with thanks: 

1. Assignment of rights to buyer: CPLR § 1018: in transfer of property interests, "the action may be continued by or against original parties unless the court directs the person to whom the interest is transferred to be substituted or joined in the action."; FRCP Rule 25(c), virtually identical.

2. Real Property Law § 223: owner's rights and remedies run with the land, and may be assumed by the new owner. 815 Park Owners, Inc. v. West LB Admin. , Inc., 119 Misc. 2d 671, 673, 463 N.Y.S.2d 1015, 1017 (N.Y. City Civ. Ct., N.Y. Co., 1983); thus, a new owner can in theory pursue claims of prior owner as against others, but:

* Practice Tip: representing Buyer (B), provide in your Contract of Sale (CS) for assignment of claims at closing: don't rely on operation of law, or how a court might rule, put it in the contract!

3. Effect of Closing:

a. doctrine of merger: generally a bar to claims arising from CS. Dourountoudakis v. Alesi, 271 A.D.2d 640, 641, 706 N.Y.S.2d 476, 476 (2d Dept. 2000); White v. Long, 204 A.D.2d 892, 894, 612 N.Y.S.2d 482, 484 (3d Dept. 1994), rev. on other grounds, 85 N.Y.2d 564, 626 N.Y.S.2d 989 (1995); All Brands Fork Lift Corp. v. Yetish, Inc., 16 Misc.3d 602, - N.Y.S.2d --, (N.Y.Sup. Jun 04, 2007).

*Practice Tip: critical, when you represent B, to insure CS has specific environmental representations, warranties, covenants and indemnities that survive closing. Avalon Realty, Inc. v. Baumrind, 203 A.D.2d 185, 185, 610 N.Y.S.2d 269, 269 (1st Dept. 1994) (holding that, given false representations re lack of tidal wetlands on property, B justified in canceling CS), leave to app. dism'd 84 N.Y.2d 864, 618 N.Y.S.2d 8 (1994).

b. indemnities: enforceable to require B or S to reimburse the other for cleanup costs, but, courts strictly and narrowly construe indemnities or similar provisions in CS that seem to bar sharing of costs. Heimbach v. Metropolitan Transp. Authority, 75 N.Y.2d 387, 553 N.E.2d 242, 553 N.Y.S.2d 653 (1990); Hooper Associates, Ltd. v. AGS Computers, Inc., 74 N.Y.2d 487, 548 N.E.2d 903, 549 N.Y.S.2d 365 (1989); Trama v. Eugene & Shirley Drach Realty Corp., (37 A.D.3d 454, 829 N.Y.S.2d 597)(2nd Dept., Feb 06, 2007) (holding the extent of a release "depends upon the controversy being settled and may not be read to cover matters which the parties did not desire or intend to dispose of"); State v. Tartan Oil Corp., 219 A.D.2d 111, 114, 638 N.Y.S.2d 989, 991 (3rd Dept. 1996) (holding that indemnity clause did not prevent B, who is current owner, from suing past owners for oil discharges); Hodes v. Vermeer Owners Inc., 14 Misc.3d 366, 824 N.Y.S.2d 872 (N.Y.City Civ.Ct.)(2006); Gettner v. Getty Oil Co., 226 A.D.2d 502, 503, 641 N.Y.S.2d 73, 74 (2ndDept. 1996) (applying narrow reading to release); Commander Oil Corp. v. Advance Food Serv. Equip., 991 F.2d 49, 51 (2d Cir. 1993). Gulf Islands Leasing, Inc. v. Bombardier Capital Inc., 2006 WL 314523 (S.D.N.Y. Feb 10, 2006)

c. Merger doctrine does not bar claims for or based on:

i. fraud: Schooley v. Mannion, 241 A.D.2d 677, 659 N.Y.S.2d 374 (3rd Dept. 1997); Lawlor v. Engley, 166 A.D.2d 799, 800, 563 N.Y.S.2d 160, 160-61 (3rd Dept. 1990); West 90th Owners Corp. v. Schlechter, 137 A.D.2d 456, 459, 525 N.Y.S.2d 33, 36 (1st Dept. 1988); Gulf Islands Leasing, Inc. v. Bombardier Capital Inc., 2006 WL 314523 (S.D.N.Y. Feb 10, 2006).

ii. mutual mistake: Schultz v. Hourihan, 238 A.D.2d 818, 820, 656 N.Y.S.2d 526, 529 (3d Dept. 1997); Larsen v. Potter, 174 A.D.2d 801, 802, 571 N.Y.S.2d 121, 123 (3d Dept. 1991); Copeland v. Nathaniel, 164 Misc.2d 507, 511, 624 N.Y.S.2d 514, 518 (Sup. Ct. Westch. Co. 1995);

iii. indemnification, representation or similar provisions that parties intend to survive closing, or outside contract (e.g., statutory): Goldsmith v. Knapp, 223 A.D.2d 671, 673, 637 N.Y.S.2d 434, 435 (2d Dept. 1996); All Brands Fork Lift Corp. v. Yetish, Inc., 16 Misc.3d 602, - N.Y.S.2d --, (N.Y.Sup. Jun 04, 2007).

iv. environmental statute: White v. Long (above). Because this is so key, see discussion below of applicable federal and state environmental statutes

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